Final answer:
Because of automatic stabilizers, in recessions the government budget deficit increases due to lower tax revenues and higher welfare spending, while in expansions the deficit decreases as tax revenues rise and spending on benefits falls.
Step-by-step explanation:
Because of automatic stabilizers, in recessions the government budget deficit increases, which is evidenced by historical data such as during the early 1990s, 2001, or 2009 when the actual deficits were larger than the standardized employment deficit. This happens because in a recession, less income is earned and consequently less tax is collected, while more people qualify for government benefits like unemployment and welfare, leading to increased government spending.
Conversely, during economic expansions, as incomes rise, more taxes are automatically collected and fewer people are eligible for benefits, causing the government budget deficit to decrease. This natural fiscal policy acts to stabilize the economy.
The standardized budget deficit or surplus, which shows what the deficit would be if the economy were at its potential GDP level, helps illustrate the impact of automatic stabilizers. During the late 1990s, for instance, the United States experienced budget surpluses, and the standardized employment budget surplus was lower than the actual budget surplus, indicating that the automatic stabilizers were less influential in a booming economy.